APAC Coal Limited (AAL.ASX)

APAC Coal Limited (AAL.ASX) is raising $15mil through the issue of 75 million 20c shares for coal exploration purposes. The issue is scheduled to close on the 15th May 2008 and the listing of shares on the 5th June 2008.
I am excited by the prospect of another coal explorer given the high coal prices. I should remind shareholders that I recommended Pike River Coal (PRC.NZE) about 8 months ago on the basis of its attractive coking coal mine development in NZ. I'm pleased to see its now up to $1.25, and no doubt going higher. NZ coal is actually pretty good, though the seam characteristics are not as appealing as Australia. The infrastructure is a bit patchy given the proximity to port, as only an island could be. Sorry for the digression.
Reading the prospectus for this company, one would have to say it has some appeal, but its a high risk proposition. The company is buying a coal concession in East Kalimantan, an established coal production area, for a $A40 million vendor consideration. This would not be an unreasonable amount in alot of cases, BUT consider:
1. They have outlined only a very small resource
2. The coal is very high in ash, thus low in calorific value

There are some positive factors as well:
1. The project area is very close to a port, though it such a tight coal market I doubt whether any operator would have room for such high ash coal. so from a strategic and marketing angle, this report has alot of holes for cockroaches to crawl through.
2. The coal has the capacity to be washed to produce a higher energy coal with lower sulphur. Notwithstanding that fact, this is pretty shit coal. It has an ash content of 30%. I dont think I would mind that so much if there was coal washability test results to add confidence. Regardless, there is the prospect of high grading the coal onsite, though there would be a lot of ash and fines generation I dare say.
3. The coal actually suits mine mouth power station generation, unfortunately there is little electricity demand in Kalimantan, since its one of the least populated islands. So the question is - couldn't domestic and export mines find a better quality coal than 30% ash? with high sulphur. Afterall there are billions of tonnes. I wonder what they are mining, or whether they are smoking it.
4. The coal is lower grade sub-bituminous coal. That explains why this coal concession is being offered. The company is confident they can increase the calorific value by washing it. Well duh! But that costs money. They make the claim that washing will reduce the sulphur content of the coal. Maybe true, but that assumes the sulphur is tied up in the ash to be liberated and not in the coal. there is no washability testing, so how are we to know. Maybe they excluded that data because the results were negative. But Indonesian coal is already considered low-sulphur, so no benefit there.
5. I like the fact that they have a large concession area of 68,360 hectares, as it offers at least the possibility of resource potential. Pity that they have done so little work on it. I guess that is reason to believe its no better than what they currently have, so I downgrade it. No coal quality data, seam thicknesses.
6. They already have 5.1Mt of coal outlined...a small amount but useful. There are two potentially economic and open pittable coal seams within the project area. Exploration data indicates that the upper seam (A seam) ranges in thickness from 2.19-2.88m and the lower seam (B seam) from 3.95-8.13 metres. These are not bad thicknesses of coal given the opportune timing of this issue (high coal prices), its preparedness to start coal mining, its proximity to coal loading facilities and export markets. Given the faulting/thrusting and relatively steep dips though, i'm inclined to think there is little more mineable coal.
7. Hidden seam - they briefly talk about a 3rd higher calorific value (6266kcal/kg) seam. i guess that is much deeper, so not open cut.

This prospectus strikes me as ill-prepared, or maybe its just that ASIC has low standards and ASX could care less. Why is there no coal washing tests, no market study by Barlow Jonker. Well consider they offer a price comparison with Indonesian reference coal prices, but they are on a different basis, one air dried, the other gross as received. confusing. Nice if they could standardise energy basis, as well as allow a discount for high sulphur coal.

They do make the point that the coal can be blended with higher energy coal at the port, which is a great strategy if there is a shortage of coal, as there is now. The problem is this is shockingly bad coal with 37-39% ash, as well as being very high in sulphur as well (1.4-2.4%S). It is true this coal does make sense as a domestic coal, particularly for a fluidised bed boiler, which can readily accept all types of coal. the location of the coal is good. Have they done any testing on the washability characteristics of the coal?
The independent consultants believe the coal could be upgraded by washing. So where is the simple testing to verify? Christ, sounds like someone is trying to sell me a 'boiled lollie'. Haven't had one of those in a while. Another unattractive features is the 20degree dip of the coal, which is going to reduce readily accessible open cut resources.
Nine coal outcrop positions have been recorded by the geologists for the 890 km2 area. These outcrops have been logged but not sampled. I wonder whether it was because the coals are not worth it.
In the case of this independent report, I suspect the consulting geologist spent little time proof reading his work since he states "The reported grades, tonnages and contained ounces may
be rounded to two significant figures in accordance with recommendations of the JORC Code". Usually we dont describe coal in ounces.
Magnus Energy, the Singaporean vendor is receiving 200mil shares for its interests - thus valuing them at $40 million. The question is - are the projects worth that much? I hope they are talking $HK rather than $AUD, as the project value strikes me as worth $5-10mil rather than $40mil. Hope shareholders dont mind the dilution. The vendor period is 2 years. I wonder if they are allowed to short the stock. I think company directors are coming up with clever ways to get around the laws. There is always a financier out there prepared to facilitate them. Silly world we live in.
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Andrew Sheldon www.sheldonthinks.com

Energy and Minerals Australia Limited (EMA.ASX)

Energy and Minerals Australia Limited (EMA.ASX) is a new uranium listing planning to raise $5mil through the issue of 12.5 million 40c shares. The offer closes 2nd May 2008 and the scheduled listing date is 23rd May 2008. You can download the prospectus from www.eama.com.au. The company is exploring the Mulga Rock deposits, previously explored for uranium by a Japanese company, though EMA will also investigate reported cobalt, nickel presence. It should be acknowledged that the principals of the company acquired this project in 2000, and now its become the basis of a listing. It might be pertinent therefore to know whether the company has performed any exploration on the project in accordance with the minimum expenditure requirements of the WA State Legislation. Why? Because if they haven't then the assets dont look too valuable.
I am actually surprised that this company is able to list given the dubious claim it has on the tenements under consideration. I dont doubt the WA Dept of Minerals will validate the sellers title to the area, if only because the title is being offered to the public. In a sense I think the public is being used to validate the title of the vendor. Thats a sorry state of financial regulation. a significant conflict of interest. The vendors could argue the title was always intended for living, in which case it seems they were not sincere in their contract with the WA governmet to meet the minimum standards of exploration expenditure.
Anyway thats my independent opinion - and no one is paying me. As far as the Mulga Rock deposits are concerned, they may as well be called the 'Mulga What?' deposits because I see no compelling value within the immediate vicinity of the Ambassador and Emperor deposits. Why? Well 0.2 metre mineralised intervals spell consistently poor results. So much for a 'trophy' project. So where is the value in this listing. I can't find anything. Certainly the surrounding area has exploration potential, particularly for sandstone-hosted deposits, but its not something I would pay much for. So the next question is - what are shareholders paying for this opportunity? What is the vendor consideration? The Japanese department spent $11.77mil in this project area - as only a Japanese bureaucrat could do. Dont take this as a sign of value. In Japan they build soccer stadiums that can't even cover their operating costs. I am also inclined to dismiss this company because its exploration will end up being grassroots. There are much better buys.
Finally got to the vendor consideration for the listing - on that point the company sponsors are very reasonable. They are valuing their equity at cash value. I would still not be interested in this company as it just doesn't have compelling, tangible upside. Low quality potential in fact.
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Andrew Sheldon www.sheldonthinks.com

Richmond Mining Limited (RHM.ASX)

The company is a gold, copper, nickel, platinum and uranium explorer. It is raising $3.5mil through 20c share issue. Issue closes May 16th 2008, listing on the 29th May 2008. No info at this stage, as the prospectus has not yet been lodged.
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Andrew Sheldon www.sheldonthinks.com

Handini Resources Limited (HDI.ASX)

Introduction

Handini Resources Limited (HDI.ASX) is an IPO that is due to be listed on the ASX on the 28th April 2008. The company plans to use the proceeds from the capital raising to fund diamond exploration. The company is raising $5 million before costs by issuing 10 million shares, and have provisions for an extra $5 million (10mil shares). In addition there are already 138 million vendor shares allocated to the seed investors and project sponsors, resulting in a post-IPO issued capital of between 186-204 million (average 194mil). Assuming the stock enters the market at 50c (par value), that gives the stock a market value of $97 million.

The company's website is www.handiniresources.com. The offer closes 14th April 2008 so you will need to download your prospectus and despatch the application form.

Management
I dont know the management of this company but have no doubts about their capacity to undertake their proposed strategy. The doubts I have arise because of the lack of commercial sense for investors.

Projects

Handini Resources in July 2005 acquired a 60% stake in a 30-year coal concession in Jambi Province, Sumatra, Indonesia. The contract of work (COW) has a JORC-compliant proven reserve of 22.9mil tonnes, plus a probable 1.1Mt. The greater resource inventory is 31.7Mt Measured and 5.2Mt Indicated. The company commenced mining in March 2006, and in the 7 quarters since the company produced 1.4Mt of coal. The company is planning to use the proceeds to fund the expansion of production from 1.2Mtpa to 2.5Mtpa. There was a significant scaling up in production from May 2007, which might give investors confidence. My concern however is that that higher output was motivated by opportunism rather than long term sustainability. Power stations have been struggling to secure coal supplies of late. I read recently that National Power Corp in the Philippines was facing a shortage. The implication is that prices are now VERY HIGH, so its a good time to sell a mine, particularly one that lacks resources. My concern is that export only makes sense at these very high prices.

The coal project comprises 2 very small concessions really, so I dont see scope for a significant increase in resources, though they might be able to secure more leases. That task does however become more difficult when thermal coal prices are so high. I'm sure its a roaring trade to convert Indonesian 'rupiah' into AUD, so there are likely a lot of deals being done.

Stock Outlook

When I first glanced at this prospectus I thought "Great...finally a good company...a company developing an exciting project in an exciting market". But this is far from that. I was disappointed, and tend to see the IPO as an opportunity to divest rather than fund exploration or development since the company is already in production at a time of high coal prices. You might ask. Wouldn't they raise more money if they wanted to divest. I think not because that would reflect badly on the issue if it failed to get subscriptions. That is a risk if you attempt to raise too much money.
There is a vendor escrow period period to consider - see page 14, part 2 of the prospectus. This was not adequately explained to me. The Indonesian government has its own regulations as far as equity is concerned.
Basically the aspects I dont like about this company are:
1. Small resource base with little possibility of increase because of small title area
2. Long development lead time for domestic coal supply to a power station
3. High truck haul through the mountains to Padang export terminal - and its high moisture coal. 4. The high valuation implied by the vendor consideration of $97 million
The positive aspects about this company are:
1. The coal is well-suited to mine-mouth power station feed. That is however a longer term proposition and open to greater competition. Details on the Indonesian government's plans to expand domestic coal supply. The company is taking the sensible strategy of investigating a mine-mouth power station, which is consistent with the government’s plans to expand output. The problem is that power stations take years to plan & build. I would think 3 years minimum for a small plant, and possibly 5 years if you consider that there is likely to be a backlog of orders for turbines, fluidised boilers, etc.
2. Coal prices look like staying high for some time, though new supplies are destined to become available from Australia, Indonesia and China, and we are looking at some global softening. One might argue that the tight supply of equipment in mining & power generation will actually crimp the demand for coal significantly.

It is difficult to place a valuation on this company without knowing their mine costs, and more importantly their transport costs to port, particularly given the very high cost of fuel. The company has not provided an independent assessment of the value of the project. I woulds think my former employer Barlow Jonker would be coal consultant able to perform that for them. It might have supported their IPO....but maybe not.

So thumbs down on this one for me.

Eastern Iron Limited (EFE.ASX)

Introduction

Eastern Iron Limited (EFE.ASX) is an IPO that is due to be listed on the ASX on the 21st May 2008. The company plans to use the proceeds from the capital raising to fund exploration for channel iron ore deposits in the Cobar district of New South Wales. The company is raising $5 million before costs by issuing 25 million shares. In addition there are already 21 million vendor shares allocated to the seed investors and project sponsors, resulting in a post-IPO issued capital of 46 million shares. Assuming they enter the market at 20c (par value), that gives the stock a market value of $9.2 million, and we should not forget the 9.2 million options going to Platsearch, directors, consultants and the broker.

The company's website is www.easterniron.com.au. The offer closes 30th April 2008 so you will need to download your prospectus and despatch the application form.

Management

I know the senior management of this company very well having worked for Lachlan Resources in the early stages of my career. They have a background in base metals and precious metals rather than bulk materials, but its not entirely unrelated, and justifiable in a tight resources market.

Projects
EFE has acquired from Platsearch, a related company, an 80% interest in 15 tenements that cover extensive networks of iron-rich palaeochannels with a combined length of more than 1,100 kilometres. Potential for Channel Iron Deposits (CID) that are shallow and easily extractable. The prospectus does convey convincing evidence that there are large resources of iron oxide in the Cobar area and that the potential exists to mine iron ore on a large scale. I did however find the evidence conveyed by the prospectus less than convincing in several respects:
1. The beneficiation process can produce a iron oxide concentrate that is sufficiently high grade to export without finer crushing and agglomeration or sintering.
2. That any iron ore concentrate could be shipped to an East Coast port such as Port Kembla or Newcastle.
3. There is currently no East Coast port handling iron ore concentrates. Apart from the fact that large scale mining to achieve cheaper rail freights would be required, it would also require dedicated storage and shiploading facilities at the port. Basic research by myself suggests that there might be berths available (BHP Berths 2-4), but that the berth & channel draft on these are just 15m compared to 18-21 metres in WA, which are incidently closer to China. The implication is that this project cannot compete with WA on rail freight, ship capacity. I would also suggest that its unlikely that an iron ore facility would have access to such infrastructure ahead of the 'well-established' coal industry. The same can be said of rail in the Hunter Valley, and I can't see a great desire to having iron ore trains passing through Sydney in large volumes, and Port Kembla is too far away anyway. Thats my background in bulk materials speaking... even if its 5 years out of date. Hunter Valley rail and port infrastructure has been fully-utilised for years. I see no reason why that would change. Yes, the East Coast has good infrastructure, its just not adequate to cater for the EFE's needs. Are there any signs of that changing? Well given the tight labour market, not without significant immigration and government funding, which is not contrary to Labor policy, but a long term prospect nevertheless.

The prospectus saids "Sampling and assaying material taken from drill holes across a paleochannel show remarkable consistency in the range of 12%-17% total iron". The implication is that these concentrations are likely to be a basin-wide phenomena, in which case the project might struggle to produce a higher grade iron ore concentrate without finer crushing. Given the location this project doesn't just have to level peg with the Pilbara, it has to exceed them. There is a plethora of iron ore around the world. This project would be uneconomic at much lower iron ore prices, which is why no one has ever thought to assess it before. The counter-argument is of course that China presents a huge emerging market, whose growth will keep prices high. Its possible but generally markets strike a balance. There is lower (capital) cost iron ore production capacity in WA which will come on much sooner than EFE's project. The "proximity of road and rail networks in both the Cobar and Euabalong areas" is really a less significant issue since WA mines and projects have the same benefit.

Project Valuation

I am less than impressed with the fact that no independent valuation of these iron ore project areas have been made. The fact that Glenn Goodacre and Bob Richardson are associated with the Lachlan Resources-Platsearch companies really begs the question. EFE purchased these leases (ELs 6710, 6711, 6671, 6672, 6706, 6952 to 6954 and 6956 to 6962) from PlatSearch on 30 January 2008, and the consideration for the purchase was As consideration for the 80% interest in the tenements was 11,000,000 shares at $0.03 per share and 5 million options at $0.001 per option with an exercise price of $0.35, an expiry date of 19 December 2012. There is also a requirement to complete expenditure of $2 million on the tenements within 4 years from 1 Nov-07 to retain the 80% interest. Nevermind the options, the same shares are now being offered to EFE shareholders at 20c. I think the prospect of mining shareholders is a little more tangible than the prospect of mining iron ore. Some effort should have been performed to look at the infrastructure bottlenecks in New South Wales prior to lodging this prospectus.

Stock Outlook

Again I make the point that there are listed companies on the market, cashed up, with an odd 1Moz of gold at commercial grades within 1-2 years of mining trading at similar values to the implied value of EFE prior to listing. I therefore predict that this company will die a slow death unless it changes direction. You might think that is all fine and well, but shareholders are committing to $2mil of expenditure (half the proceeds raised) and dilution from 45% vendor equity that in less than a year seems to have been marked up in value considerably without any third party 'independent' assess of its worth.
An independent geologist has said that "The purpose and scope of this report is to assess the technical information contained in the prospectus, to verify independently, the sources of information and to make relevant comments on the integrity of that information and the work proposals contained herein". I agree that in the scope of the narrow scope of the report he has done that. But issues that should have been addressed by this report have not been. Or maybe they were unfavourable so they were excluded.
Sorry people this is another stock I dont like. I hope its not a pattern.

Argent Minerals Limited (ARD.ASX)

Introduction

Argent Minerals Limited (ARD.ASX) is an IPO that is due to be listed on the ASX on the 3rd April 2008. The company plans to use the proceeds from the capital raising to fund exploration for base metals and precious metals. The company is raising $4 million before costs by issuing 20 million shares. They have also made provisions to raise another $1mil (5mil extra shares). In addition there are already 21.94 million vendor shares allocated to the seed investors and project sponsors, resulting in a post-IPO issued capital of 46.9 million shares (if $4mil raised). Assuming they enter the market at 20c (par value), that gives the stock a market value of $9.3 million.
Approximately 3 months after the IPO the company intends to offer shareholders the opportunity to participate in a 1:1 rights issue. The sweetener of a June 2011 option will mean nothing if shareholders can’t generate get earnings, but they have to pay 1c for it. I guess it will be worth 2-3c if the share price is 16c after issue. The option entitlement will help support the share price, as will any drilling.

Management & Board

One of the reasons I don't like this company is that it has only one independent director, and that independent director has little exposure to the mining industry of late. David Timms if I recall is over 70 years old, so I am in doubt as to his capacity to function as a technical consultant well beyond retirement age. I wish I could tell you his age. Most IPOs tend to include that information, but it seems to have been omitted. Was it excluded because its important or because it isn't. Its interesting to ponder why David Timms left Golden Cross Resources. Did he leave of his own volition or was he pushed....given his age.

Projects

The company is exploring the Kempfield & Sunny Corner projects prospective for silver, lead, zinc and gold, as well as the West Wyalong areas (copper/gold) farmed out by Golden Cross Resources. There is already a resource calculation for Kempfield and pre-feasibility study, though this study is so old, and the 7 drilling campaigns should be deemed to have reduced the value of the resources since Golden Cross Resources (the vendor) has not sought to upgrade/downgrade the resource, or update the study.
I have little confidence in their Sunny Corner project. That project area, as well as Kempfield have been looked over by so many companies in decades past, I doubt they warrant much consideration. The West Wyalong project is worth some attention because there is an anomaly to test, and the presence of commercial gold grades is interesting, even if the single drilling intersection was just 2m wide.
After spending $3.25 million on these projects it will hold a 51% share. By spending an additional $1.2 million it can earn 70%.

Stock Outlook

I expect this stock will fall from its 20c issue price to 12c after listing. Being listed in this market is probably worth $3-4 million in itself, and they will have cash reserves of $4 million, but since they are obliged to waste money on these project areas, and might even go further, one has to downgrade their cash backing. The free option can be expected to perk the stock up a bit in 3 months, and some drilling might warrant speculative upside, though i only see that at West Wyalong. There is so much better value in the market, and I think seed investors will be dumping this stock.

My Analysis

I found very little to like about this company, but a lot to dislike about it. It stinks of nepotism, conflicts of interest, and shoddy disclosure. Why? Well David Timms is the former managing director of Golden Cross Resources (GCR) , and maybe he or a relative still is a large shareholder in Golden Cross with a vested interest in helping it to raise cash. They have disclosed the fact that there is only one independent director, so I guess that guy's concerns got dismissed in that 'democratic facade'. I think a valuation should have been performed on the exploration areas as I can't for the life of me see where the $4.5 million in implied value comes from. New shareholders I believe are about to be diluted by the old.
The vendor consideration for this issue is far too large, so my advise is don’t participate in the issue. Is there an attempt here for Golden Cross Resources to use this IPO as a means to raise cash to fund its more mature gold projects. Several years ago GCR used to proudly flaunt its capacity to use farm-in partners funds to fund exploration. I raise this point because its Canadian partner has withdrawn from its Cargo project and the share price of Golden Cross has plummeted (along with other explorers). One would do well to look at GCR's cash position.
I guess my problem with this prospectus is that it hides behind the law. Instead of revealing facts or conflicts, it just discloses disclaimers. We are used to that from banks and others. I don't think due regard is being given to new shareholders . I dont see much respect for the interest of shareholders. In lieu of the future share price, new shareholders have my sympathy.
The following disclosure by the accountants is interesting. They wanted to assure us that they are making no statement as to the value of the resources. I can appreciate their "risk sensitivity".